Capital costs impact a farm’s bottom line

Over the past few years, favorable commodity prices and crop yields in the Saginaw Valley have allowed many farms to undertake some overdue upgrades of farm machinery and make other improvements. These capital purchases are great for the farm and rural economy, generating a great deal of business activity. As a result of the higher than normal capital investments, we have seen a drastic increase in depreciation, which is being reported as part of a farm’s overall annual cost of production. These numbers can be seen in the “Type of Farm Business Summary Reports”, found on the Michigan State University ExtensionFIRM web page.

Most farms have taken the expanded accelerated depreciation and bonus depreciation as a cost on the Federal 1040 -Schedule F tax forms, at an average of $108.73 per acre for the years 2010 through 2012. Ten years prior, during 2000 - 2012, depreciation on equipment and improvements was $38.75 per acre. This is a cost increase from $0.21 per bushel to $0.59 per bushel applied to a 185 bushel corn crop, not that the $0.38 per bushel is a change that must be accounted for. If a farm uses this tax depreciation value in calculating the farm’s cost of production, it will substantially raise the break-even prices to levels higher than what may be available from the current corn price. So farms may want to use an alternative method to estimate a depreciation value that may be closer to an actual calculation of the decrease in their equipment value over time.

ANNUAL DEPRECIATION = (purchase price – salvage value) / useful years

Real depreciation is much different from the values reported on tax returns, where a tractor goes from full purchase price to zero value in seven years or with bonus depreciation from full purchase price to 50 percent value in the first year. Or, you may choose to use Section 179, Direct Expense option, which allows you to take up to 100 percent of the purchase price deduction in the year of purchase. With all these options and methods, a farm needs to step back for a moment and calculate a value that represents their situation. This is a good topic to discuss with your farm’s financial advisor.

Depreciation taken

2000-02

2010-13

$ change

Machine

37,098

75,625

38,527

Buildings

9,098

24,902

15,804

Total depreciation

44,754

100,572

55,818

*data taken from Type of Farm Business Analysis Summary Reports, Michigan State University

Farms can find a set of crop production cost budgets on the FIRM web page. These templates are a quick method to compare various crops in a side by side worksheet which can allow the user to look at impact of changes in prices and production practices.